Abstract
The regulation of consumer credit in Europe derives from a variety of sources both at EU and national levels (laws, regulations and administrative provisions), many of which are responses in the course of time to emerging regulatory needs.
The adoption of the first Consumer Credit Directive certainly acted as a significant driver at national level for legislative intervention in those countries without specific consumer credit laws as well as for rationalisation and reform in countries with existing and differing frameworks.
In the years that followed, expansion in the supply and variety of credit forms allied to strong demand from consumers meant a series of legislative updates and amendments until the radical, wide-ranging reforms contained in the new Consumer Credit Directive.
In this chapter we will examine the principal changes contained in the new Directive and how these will affect lenders' activities and their relations with customers.
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Notes
- 1.
Examples include provisions adopted to prevent money laundering and terrorist funding as well as measures aimed at regulating the use of personal data.
- 2.
See Directive 87/102/EEC of December 1986 for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit, in Official Journal L 042, 12th February 1987.
- 3.
See Directive 2008/48/EC of the European Parliament and of the Council of 23rd April 2008 on credit agreements for consumers and repealing Council Directive 87/102/EEC in Official Journal of the European Union, 22nd May 2008. Member States should adopt and apply the provisions necessary to comply with the new Directive at least before 12th May 2010. The need for regulatory overhaul is pointed out at the “whereas (5)”: “In recent years the types of credit offered to and used by consumers have evolved considerably. New credit instruments have appeared, and their use continues to develop. It is therefore necessary to amend existing provisions and to extend their scope, where appropriate”.
- 4.
The first Directive (87/102/EEC) was passed at a time when, especially in some countries, the use of consumer credit was still limited and the forms in which it was granted were comparatively simple. With the aim of creating a single consumer credit market and establishing a minimum shared framework of consumer protection, the 1986 Directive established only certain basic principles to be respected and left individual Member States the opportunity to introduce more restrictive legislation where necessary. Such an approach over time generated marked cross-country differences, above all in the area of consumer protection, which in turn led to distortions both in terms of competition amongst EU lenders and consumers' access to cross-border credit.
- 5.
See Council Directive 90/88/EEC of 22nd February 1990 amending Directive 87/102/EEC for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit, Official Journal L 61 14 10.3.1990.
- 6.
See Directive 98/7/EC of the European Parliament and of the Council of 16th February 1998 amending Directive 87/102/EEC for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit, Official Journal L 101, 01/04/1998.
- 7.
See Whereas (4), Directive 2008/48/EC, which draws attention also to the fact that “Those distortions and restrictions may in turn have consequences in terms of the demand for goods and services”.
- 8.
An analysis of the problem areas and weak points connected to the new Directive, which entails a detailed assessment of current legislation in force across the EU, is outside the scope of this chapter. For an analysis of the difficulties faced in carrying out such an assessment, see Oxera (2007), whilst for criticisms of the Directive see the position papers of the House of Lords (2006), Sveriges Konsumentrad (2006), European Commission (2005), European Financial Services round table (2006).
- 9.
Directive 2008/48/EC, at Whereas (6) and (7).
- 10.
Directive 2008/48/EC at Whereas (9).
- 11.
Consequently, Member States may, for example, maintain or introduce national provisions regarding joint and several liability of the seller or the service provider and the creditor. A further example of this possibility for Member States could be the maintenance or introduction of national provisions regarding the cancellation of a contract for the sale of goods or supply of services if the consumer exercises his right of withdrawal from the credit agreement. On this question, Member States, in the case of open-end credit agreements, should be allowed to fix a minimum period from the time when the creditor asks for reimbursement and the day on which the credit has to be reimbursed.
- 12.
Article 22 (3) and (4).
- 13.
Whereas (4)–(9).
- 14.
Whereas (4)–(9).
- 15.
See articles 4–7,10–12,18–19.
- 16.
See articles 8–9.
- 17.
See articles 13–17.
- 18.
See articles 20–21.
- 19.
The role information plays in decisions regarding indebtedness were discussed in Chap. 4. There is little doubt that transparent, correct and comprehensive information is fundamental in enabling the consumer to make an informed decision. It must be pointed out, however, that the emphasis should be on quality rather than quantity. Indeed, a disclosure overload may prove to be a hindrance rather than a help.
- 20.
See article 4.
- 21.
See articles 5–6–7–8–9.
- 22.
See article 10.
- 23.
See articles 11–12–13–14–15–16–17–18.
- 24.
This means “any instrument which enables the consumer to store information addressed personally to him in a way accessible for future reference for a period of time adequate for the purposes of information and which allows the unchanged reproduction of the information stored”.
- 25.
More specifically, the borrowing rate, the total amount of credit, the annual percentage rate of charge and, if applicable, the duration of the credit agreement, the cash price and amount of advance payment in the case of credit for deferred payment on goods or services and the total amount payable by the consumer and the amount of instalments.
- 26.
See article 5, subparagraph 6.
- 27.
The form is reproduced in the Appendix at Table 5.5.
- 28.
See article 7. There are other, albeit minor, cases which pursuant to the Directive are to be considered as specific: one is the case of credit agreements under which payments made by the consumer “do not give rise to an immediate corresponding amortisation of the total amount of credit, but are used to constitute capital during periods and under conditions laid down in the credit agreement or in an ancillary agreement” (article 10, subparagraph 4).
- 29.
For a description of the various credit supply-side players, see Sect. 5.6.
- 30.
In the case of voice telephony communications, the Directive states pre-contractual requirements shall be regulated by the provisions of Directive 2002/65/EC concerning the distance marketing of consumer financial services and amending Council Directive 90/619/EEC and Directives 97/7/EC and 98/27/EC. Information to be provided concerns the main characteristics of the financial service “together with the annual percentage rate illustrated by means of a representative example and the total amount payable by the consumer” (article 5, subparagraph 2). Furthermore, if the agreement has been concluded at the consumer's request using a means of distance communication such as voice telephony, the creditor “shall provide the consumer with the full pre-contractual information using the Standard European Consumer Credit Information form immediately after the conclusion of the credit agreement” (article 5, subparagraph 3). The following paragraph provides for increased consumer protection, providing that the consumer shall on request, receive together with the Standard European Credit Information, a copy of the draft credit agreement free of charge. This provision shall not apply “if the creditor is at the time of the request unwilling to proceed to the conclusion of the agreement with the consumer” (article 5, subparagraph 4).
- 31.
Defined as “All the costs of the credit, including interest and other charges directly connected with the credit agreement”, see article 1 (d), Directive 87/102/EC.
- 32.
Defined as “The total cost of the credit to the consumer expressed as an annual percentage of the amount of the credit granted”, see article 1(e), Directive 87/102/EC.
- 33.
See Council Directive 90/88/EEC of 22nd February 1990 amending Directive 87/102/EEC for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit, article 1 and annexes.
- 34.
See Directive 98/7/EC of the European Parliament and of the council of 16th February 1998, article 1 and annexes.
- 35.
Whereas (43) states that “Despite the uniform mathematical formula for its calculation, the annual percentage rate of charge provided for in Directive 87/102/EEC is not yet fully comparable throughout the Community. In individual Member States different cost factors are taken into account in the calculation thereof. This Directive should therefore clearly and comprehensively define the total cost of a credit to the consumer”.
- 36.
See article19(2).
- 37.
(1) The amounts paid by both parties at different times shall not necessarily be equal and shall not necessarily be paid at equal intervals; (2) The starting date shall be that of the first drawdown; (3) Intervals between dates used in the calculations shall be expressed in years or in fractions of a year. A year is presumed to have 365 days (or 366 days for leap years), 52 weeks or 12 equal months. An equal month is presumed to have 30.4 days (i.e. 365/12) regardless of whether or not it is a leap year; (4) The result of the calculation shall be expressed with an accuracy of at least one decimal place. If the figure at the following decimal place is greater than or equal to 5, the figure at that particular decimal place shall be increased by one. (5) The equation can be rewritten using a single sum and the concept of flows (Ak), which will be positive or negative, in other words either paid or received during periods 1-k, expressed in years, i.e.
$${S = \sum\limits_{k = 1}^n {{A_k}{{(1 + X)}^{ - {t_k}}}}} $$S being the present balance of flows. If the aim is to maintain the equivalence of flows, the value will be zero.
- 38.
Article 19(5).
- 39.
See article 10, subparagraph 2, points (a)-(v).
- 40.
Directive 87/102/EEC, artiche 4, subparagraph 3.
- 41.
In the case of index-linked agreements, article 11, paragraph 2 states that the parties may agree that information relating to changes in the borrowing rate following a change in a reference rate is to be given to the consumer periodically and that “the new reference rate is to be made publicly available by appropriate means and the information concerning the new reference rate is also kept available in the premises of the creditor”.
- 42.
The Second Directive introduces several new features in comparison to its predecessor. However, when comparing the new Directive with legislation passed at national level in certain EU Member States since 1986, one can see that certain provisions have already been anticipated.
- 43.
Loi 78–22 sul crédit à la consommation 10th January 1978.
- 44.
Loi du 12th juin 1991 sur le crédit à la consummation.
- 45.
Verbraucherkreditgesetz 17th December 1990.
- 46.
Consumer Credit Act 1974–2006.
- 47.
Consumer Credit Act 1995.
- 48.
Whereas (26).
- 49.
The use of databases for assessing consumer creditworthiness must be in accordance with the provisions relating to the protection and free movement of personal data processing contained in Directive 95/46/EC of the European Parliament and of the Council of 24th October 1995.
- 50.
See Chap. III, Article 9, “Database Access”.
- 51.
Members subject to the provisions of the two Codes account for around 90% of unsecured lending in the UK. The remaining 10% is made up by lenders operating principally in the sub-prime market, a segment in which responsible lending is crucial in containing over-indebtedness. See Kempson (2008).
- 52.
Article 13, subparagraph 2.
- 53.
Article 14, subparagraph 3, points (a) and (b).
- 54.
Article 15, subparagraph 3.
- 55.
Article 16, subparagraphs 1 and 2.
- 56.
Article 17.
- 57.
Article 18.
- 58.
Article 20 states that “This shall be without prejudice to Directive 2006/48/EC” relating to the possibility of offering banking services.
- 59.
These intermediaries are present in countries where the supply of consumer credit is restricted to banks and specialised finance companies. Their number is clearly much lower in those countries where credit can also be granted by licensed lenders who use funds from the banking system to finance specific market segments.
- 60.
See Chap. 3, paragraph 2.
- 61.
Integrity issues are assessed by the OFT by evaluating the applicant's past behaviour as regards business behaviour and possible episodes of non-compliance with the law (i.e. criminal offenses involving violence, fraud, dishonesty, any breach of the Consumer Credit Act or of other consumer protection law or of rules or principles of the Financial Services Authority, insolvency bankruptcy or disqualification as a director, the provision of false or misleading information to the OFT).
- 62.
The credit competences required by the OFT relate to competence and experience in granting credit. In particular, with reference to the business activities that pose greater potential risks to consumers than others, such as secured sub-prime lending and lending in the home, the OFT applies for additional information about the business model and activities the applicant intends to follow in order to ensure that lending takes place responsibly (i.e. ability to check borrowers' creditworthiness).
- 63.
Authorisation is based on a risk assessment approach which implies the request of additional information, checks carried out on the applicant's premises and risk analyses of the business segment targeted by the applicant.
- 64.
For example, membership of an OFT-approved consumer code scheme or a record of fair dealing over a significant period (i.e. evidence of no serious consumer complaints or enforcement action taken against the applicant's business as well as an active policy of addressing consumer complaints).
- 65.
The agreements excluded from the scope of the Directive are:
-
(a)
credit agreements which are secured either by a mortgage or by another comparable security commonly used in a Member State on immovable property or secured by a right related to immovable property;
-
(b)
credit agreements the purpose of which is to acquire or retain property rights in land or in an existing or projected building;
-
(c)
credit agreements involving a total amount of credit less than EUR 200 or more than EUR 75,000;
-
(d)
hiring or leasing agreements where an obligation to purchase the object of the agreement is not laid down either by the agreement itself or by any separate agreement; such an obligation shall be deemed to exist if it is so decided unilaterally by the creditor;
-
(e)
credit agreements in the form of an overdraft facility and where the credit has to be repaid within 1 month;
-
(f)
credit agreements where the credit is granted free of interest and without any other charges and credit agreements under the terms of which the credit has to be repaid within 3 months and only insignificant charges are payable;
-
(g)
credit agreements where the credit is granted by an employer to his employees as a secondary activity free of interest or at annual percentage rates of charge lower than those prevailing on the market and which are not offered to the public generally;
-
(h)
credit agreements which are concluded with investment firms as defined in Article 4(1) of Directive 2004/39/EC of the European Parliament and of the Council of 21st April 2004 on markets in financial instruments (1) or with credit institutions as defined in Article 4 of Directive 2006/48/EC for the purposes of allowing an investor to carry out a transaction relating to one or more of the instruments listed in Section C of Annex I to Directive 2004/39/EC, where the investment firm or credit institution granting the credit is involved in such transaction;
-
(i)
credit agreements which are the outcome of a settlement reached in court or before another statutory authority;
-
(j)
credit agreements which relate to the deferred payment, free of charge, of an existing debt;
-
(k)
credit agreements upon the conclusion of which the consumer is requested to deposit an item as security in the creditor's safe-keeping and where the liability of the consumer is strictly limited to that pledged item;
-
(l)
credit agreements which relate to loans granted to a restricted public under a statutory provision with a general interest purpose, and at lower interest rates than those prevailing on the market or free of interest or on other terms which are more favourable to the consumer than those prevailing on the market and at interest rates not higher than those prevailing on the market.
-
(a)
- 66.
See Sect. 5.2.
- 67.
Concerns regarding the difficulties this balancing act presents were expressed by the House of Lords (2006): “There is also a more general concern that the concept of full harmonisation is being expanded at the price of narrowing the field covered by the Directive”.
- 68.
See Whereas (10).
- 69.
See article 24.
- 70.
See Chap. 4, paragraph 4.3.
- 71.
See Chap. 2, paragraph 2.3.
References
European Commission (2005) Discussion paper on consumer credit, Health and consumer protection directorate-general
House of Lords (2006) Consumer credit in the European Union: harmonisation and consumer protection, Report, vol. I, July
Kempson E (2008) Looking beyond our shores: consumer protection regulation lessons from the UK, Joint Center for Housing Studies of Harvard, February
Sveriges Konsumentrad (2006) Modified proposal for a new Directive on Consumer Credit, Position paper, January
Oxera (2007) The benefits of financial regulation: what to measure and how? Report prepared for the Financial Services Authority, Oxford Economic Research Associates, England
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Vandone, D. (2009). Regulatory Framework. In: Consumer Credit in Europe. Contributions to Economics. Physica-Verlag HD. https://doi.org/10.1007/978-3-7908-2101-7_6
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